A Tale of Two Markets

By Elaine Kapogines

While the overarching theme for 2013 may be akin to Aesop’s famous tortoise, what may really be emerging is something more Dickensian – A Tale of Two Markets, perhaps?

Throughout the recent Canadian Mortgage and Housing Corporation (CMHC) annual Housing Outlook presentations, a number of the speakers illustrated an acute division happening in Ontario — a division that is rather counterintuitive when you look at the last decade.

“Over the past 10 years, we’ve seen that the larger urban housing markets in Central and Eastern Ontario have been capturing a growing share of housing activity,” says Ted Tsiakopoulos, regional economist at CMHC and presenter at the Toronto Housing Conference. “In 2013, a lot of these larger urban markets will be taking a bit of a breather; instead, housing markets in the northern and southwestern parts of the province will likely hold up better.”

Nationally, the story in Western Canada will continue to be stronger growth and a stronger housing market than here in Ontario; however, in 2013, although it’s predicted that Ontario’s housing volume could see a drop of about 5 percent, we will start to see Ontario closing that growth gap between itself and the West, says Tsiakopoulos.

One of the major factors impacting housing distribution across Canada is what’s going on overseas. Recently, Asia’s economy has been decelerating, largely due to what’s going on in China. But even though China has seen a 3.5 percent drop in economic growth since 2010, that market — and the other emerging markets — will still continue to grow two to three times the rate of the advanced industrial world.

For Canada, this growth is translating into an increasing demand for resources. The emerging market economies are resource-poor, and as the middle class continues to develop and become more affluent, the demand for resource-intensive consumer good continues to rise. “We’ve seen commodity prices go higher and we’ve seen a lot of business investment out West, particularly in the oil and gas patch,” says Tsiakopoulos, “and that’s translated into job creation and housing demand.”

So what does this all mean for the Ontario housing market? Well, although the province will continue to lose migrates to the West due to job opportunities, which will create a “bit of a housing leakage” here, “not all urban housing markets will suffer the same fate,” Tsiakopoulos says. Historically, we don’t generally see smaller housing markets move in tandem with the larger markets – which translates into good news for a number of areas throughout the province, specifically in Northern and Southwestern Ontario.

“In recent years, job creation in the larger urban centres has outpaced the kind of job growth we’ve seen elsewhere in the province,” continues Tsiakopoulos. “But what’s interesting in 2013 is that places like Sudbury, Windsor, London will begin to grow at or slightly above the provincial growth rate.”

This growth, in part, can be explained by these regions’ ability to diversify their economies away from goods towards services. Northern Ontario, like Western Canada, will benefit from the rising commodity prices driven by overseas demand. And with commodity prices going higher, it’s more profitable to invest in industries such as gold exploration in Timmins and mining in Sudbury — investment translates to jobs, jobs translate to workers, workers translate to housing demand.

Now, Southwestern Ontario doesn’t rely on natural resources like the north so much as its economy is based in manufacturing. “The news here is probably even better,” says Tsiakopoulos. “Ontario’s manufacturing sector has continued to expand in the face of a contraction in the sector globally.”

Edward Heese, CMHC senior market analyst and speaker at the Waterloo and Hamilton seminars, also identified Ontario’s ability to buck the global trend when it comes to manufacturing activity as a good indicator of what to expect in 2013. “The good news is that we don’t export a lot to Europe,” says Heese. “Europe’s situation is having more of an impact on our interest rates here in Canada than it is on our job growth.”

The real story here is Ontario’s close connection to the U.S. – nearly 75 percent of our exports are bound for the States — and as the U.S. economy continues to indicate recovery, Ontario’s manufacturing sector is benefitting from the demand south of the border.

“What we’re seeing in the U.S. is that there’s been pretty significant adjustment, particularly in the financial sector and the household sector,” says Heese. “This adjustment is allowing people to think about spending again — households are in a better position to spend and lenders are more willing to approve loans.”

And recovery in the U.S. spells out positive projections for specific parts on Ontario. “We’ve found that for every one percentage point change in U.S. growth, we see a six-tenth percentage point change in employment growth in Southwestern Ontario,” says Tsiakopoulos. “Alternatively, in Central and Eastern Ontario — Toronto and Ottawa — we only see three-tenths of a percentage point change. So there’s a doubling effect in Southwestern Ontario from improving growth prospects in the U.S.”

This effect is due in large part to Southwestern Ontario’s ties to manufacturing; a good chunk — 15 to 20 percent — of the labour force in this part of the province is tied to manufacturing. And in order for this area to benefit from manufacturing activity, we must see the U.S. consumer continue to spend.

“We have a few data points to suggest that U.S. consumers are coming out of hibernation,” says Tsiakopoulos. “Since the early part of 2011, the U.S. consumer has been a big contributor to overall economic growth.” And, for a number of reasons, CMHC expects this trend to continue into 2013. Recently, there have been indications that U.S. consumers have boosted their savings and are beginning to pay down debt and secure financing, which is contributing to increased consumption.

For example, automotive sales in the last part of 2012 hit four- to five-year highs. “Vehicle sales are fast approaching pre-recession levels,” Tsiakopoulos points out. “Increased vehicle demand spells good news for Ontario, because, guess what, when Americans are buying cars, what are we doing? We’re building them and shipping them south of the border.” Over 40 percent of Ontario exports are tied to automotive production and parts — and, as we’ve already seen, Southwestern Ontario is directly benefitting from this.

The U.S. has also seen fairly strong job growth in recent months — coming in above expectation. One contributing factor is worker productivity, says Tsiakopoulos. “If the U.S. has any chance of boosting output through 2013, they can’t do it by squeezing more productivity out of their labour force. The average employer will have to bring back employees.”

So now that we’ve looked at the relatively positive growth expectations of the north and southwest, what about the rest of the province? When talking about the major sectors, specifically in the GTA and Ottawa (representing Central and Eastern Onatrio), we have to look at finance, retail and public administration. But Tsiakopoulos says they don’t see these sectors contributing to economic growth the way they have in the past. The new capital requirements for the financial sector means banks will likely have to have more reserves on hand, which will continue to temper the rate of growth in credit. A slower housing market will also see credit growth slow — factors indicating that we will not see job creation in this sector.

In terms of retail, for the most part, Ontario households are doing what American households were doing a few years ago — starting to pay down debt, meaning there’s less money left over for discretionary spending. Also, consumer confidence, which has been on the rise, is still not at the levels we enjoyed through the previous decade. This is a similar story in the public sector — governments are also paying down debt and cutting spending.

As with any projection, there are potential bumps in the road that could sour this relatively positive outlook. One of the major risks to growth is the U.S. “fiscal cliff” — the looming expiration of tax cuts and spending increases that were introduced by the Bush administration, explains Tsiakopoulos. And this deadline is creating anxiety amongst the business community. But CMHC is predicting that the U.S. will avoid the cliff by either extending the expiration date or there will be a compromise between taxes and spending — either way will avoid a $600 billion leakage to the U.S. economy, lifting the air of uncertainly currently felt in the business sector and, by the latter half of 2013, will actually translate into stronger job growth.

What does this all mean for Ontario’s builders? “Overall, in the housing marketing, we don’t see much growth, but also no major disruptions coming,” says Heese. But recovery and acceleration are on the horizon. “This may not be the most optimistic forecast — although it’s not really bad news — but as Aesop taught us, slow and steady is what wins the race.”

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